HSBC shares become most overbought since 1986 after 50% rally

A 50 per cent rally has made shares of HSBC Holdings the most overbought in more than three decades, as investors piled back into the retail favourite given a brighter outlook from China’s reopening.

The stock’s 14-day relative strength index (RSI) has risen to 90, by far exceeding the 70 threshold that indicates an asset is overbought. That’s the highest reading for HSBC’s Hong Kong-listed shares in Bloomberg data going back to 1986 and puts the stock’s RSI atop the 76-member Hang Seng Index.

Hong Kong’s financial stocks have enjoyed a dramatic rise since October, boosted by prospects of more loan and investment demand following China’s Covid Zero exit. HSBC shares have ridden on the momentum, surging to a 11-month high this week from an Oct 12 trough.

The reopening of borders between the mainland and the city may unlock up to US$750 million of wealth revenues for HSBC, which counts on the city as a major source of income, RBC Capital Markets analysts including Benjamin Toms wrote in a note earlier this month.

The sale of HSBC’s Canadian unit in November has also fuelled bets of a potential one-off dividend and share buyback from early 2024, the analysts wrote.

The strategy of using RSI to trade HSBC hasn’t always been promising, according to Bloomberg calculations. Investors who shorted the stock when its RSI topped 70 and bought it back below 30 would’ve lost 60 per cent over the past five years.

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Shares of the London-headquartered lender plunged to a two-year low in October amid worries about a slow resumption in dividend payouts and increasing provision due to mainland Chinese exposure. HSBC has also been under pressure from its largest shareholder, Ping An Insurance Group, to spin off its Asian operations, a move the bank has rejected.

The potential upside in share prices from here, however, looks more modest. Analysts see an average 13 per cent gain over the next 12 months, according to estimates compiled by Bloomberg. BLOOMBERG